Believe it or not: business as usual

By Cees Quirijns on May 20th, 2009

The Vix uses options pricing as a way to measure perceived market risk and uncertainty.

On Tuesday, it fell to as low as 29.12, on track for its first close below 30 since Friday September 12, just two days before Lehman Brothers filed for bankruptcy, when it closed at 25.66.

As the credit crisis took hold in late 2007 and early to mid-2008, the Vix index was typically trading in a range of around 20 to 30.

It rose sharply following the Lehman Brothers bankruptcy, reaching levels above 80 by mid-October last year.

Its move below 30 is likely to give investors another shot of confidence as a host of measures also suggest a return of, albeit cautious, optimism.

Tuesday’s 3.5 per cent fall in the Vix to an 8-month low came as the stock market shrugged off a surprisingly low number of housing starts in April, staging a muted rally after it initially seemed that the data would push the market lower.

And it also came as 3-month dollar Libor, the cost of borrowing in dollars between banks fell to 0.7525 per cent, its lowest level since the British Bankers Association began publishing Libor rates in 1986.

The TED spread, the difference between what banks and the US Treasury pay to borrow for three months, narrowed six basis points to 57 basis points, its lowest level since the credit crisis began in August 2007.

And the Libor Overnight Index Swap (OIS) spread, another measure of banks’ willingness to lend, fell three basis points to 55 basis points, the least since February last year.

So believe or not. The markets are saying: business as usual.

At the same time, the real economy looks to be in a shambles however. More bailouts needed. Mass lay-offs and the weakest economic growth figures in years decades since World War II.

Optimists will say: old news! The markets are forward looking beasts and are clearly showing the recovery is in sight.

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